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Embracing Price Discrimination: TRIPS and the Suppression of Parallel Trade in Pharmaceuticals

In December 2005, the WTO responded to the HIV/AIDS pharmaceutical crisis in the least developed world by voting to make the first permanent amendment to the WTO Agreements since their original negotiation during the Uruguay Round. New Article 31bis will amend the TRIPS Agreement to permit compulsory manufacturing licenses in order to facilitate supply of needed pharmaceuticals to those countries lacking the technological capacity to produce these drugs themselves. The amendment reflects a substantial shift in the essential TRIPS bargain, constituting a significant give-back to those developing countries that specialize in the generic production of pharmaceuticals. To date, however, there has been no significant utilization of this facility (which was provisionally established in August 2003). Rather, patent holders have determined - perhaps under the threat of these newly authorized compulsory licenses - to supply these markets directly with HIV/AIDS drugs at prices much lower than those prevailing in developed country markets. As a condition of doing so, both the pharmaceutical industry and those WTO members that champion their interests have sought and obtained limitations on the parallel trade of drugs subject to differential pricing. This shift away from TRIPS' prior neutrality on parallel trade may well spill-over into additional areas beyond the particular context in which the amendment developed.

We make the following observations:

1. TRIPS was previously neutral on the permissibility of parallel trade. Until now, WTO members were free to either permit or prohibit the import and sale of intellectual property ("IP")-covered goods that had been placed into commerce in foreign markets. That is, IP-right holders may or may not be provided with an ancillary right to block the importation and sale of grey-market goods.

2. Parallel trade has not been a solution to assuring the supply of needed drugs to AIDS-stricken regions of the least developed world. Quite simply, there has not been an adequate source-of-supply at prices that the afflicted Least Developed Countries (LDCs) are capable of paying.

3. Compulsory licensing now has a clear legal basis as a result of the TRIPS amendment (and the provisional rule in place since August 2003), yet virtually no countries have resorted to compulsory licensing.

4. HIV/AIDS drug prices in LDC markets have fallen significantly, which suggests that pharmaceutical manufacturers have determined to supply LDC markets directly, instead of permitting LDC demand to be met by generic producers utilizing the amended TRIPS rules on compulsory licensing. Their determination to do so may have been motivated, at least in part, by the threat of compulsory licenses.

5. Both the WTO community and the pharmaceutical industry have embraced a policy of differential prices: high prices in developed markets and dramatically lower prices in LDC markets. There has also been significant differentiation in products supplied.

6. Effective controls on parallel trade are necessary to attain effective differential pricing. Without limits, low-priced drugs supplied to LDC markets would flow back, by operation of arbitrageurs, into high priced markets. This would undercut the economic returns in the high priced markets and starve LDCs of their supply. Thus, at least within the drug sector, TRIPS formal neutrality as applied to parallel trade cannot stand.

7. The European Union and the United States have non-IP restrictions that sharply reduce the likelihood of parallel trade in pharmaceuticals.

The observed positional shift in TRIPS from neutrality on parallel trade to opposition may well spill-over from the HIV/AIDS pharmaceuticals context into a larger rethinking of the appropriateness of IP-holders engaging in price discrimination.